Scott Longley: Uneasy Future – Counting the cost of BREXIT

Scott Longley
Scott Longley

Last Thursday’s ‘BREXIT’ vote sent shockwaves throughout all global stock markets. Scott Longley details the impact of the ‘Leave’ vote on UK-listed betting firms’ and their operations. An industry that has undertaken recent multi-billion £ consolidation and M&A activity, betting governance will be weary of economic uncertainty and regulatory impacts to operational hubs in Gibraltar. 

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The leading UK-listed gambling companies have seen their share prices slide in the days following the British public’s vote to exit the EU as investors fret about the impact of a potential post-referendum recession and also look to see what the future holds for the online sector’s collective operations in Gibraltar.

Even after enjoying a slight rebound on Tuesday, the sector’s giants have taken some heavy double-digit percentage hits to their value in the past few days. Ladbrokes is down nearly 14% since Thursday to 111p; 888 is off by the same percentage to 194p; Rank is off by 12.5% to 205p; 32Red is down by 9% at 121p; William Hill has fallen 8% to 260p; Paddy Power Betfair is down 8% to £8.02p; and GVC is off by 5.5% to 538.5p.

An element of the falls will be due to general negative sentiment in the markets at present and the perceived sensitivity of many sectors to a potential UK recession.

Still, a specific Brexit-related worry for the gambling companies that investors would appear to have picked up on is their exposure to an unstable situation in Gibraltar where many of the largest operators have for many years based their online operations.

It was no surprise that Gibraltar delivered a 96% percentage vote for remain on 23 June, or that in the wake of the exit vote Spain’s acting foreign minister said that co-sovereignty was “much closer than before”. This maybe be implausible right now but it was an indication of the likelihood of the Spanish authorities taking advantage of the current uncertainty to make life much more difficult for the estimated 4,000 workers – many of them employed by the online gaming industry – who commute into Gibraltar every day from Spain.

As Paul Leyland, principal at gambling industry consultancy Regulus Partners, said in the wake of the Leave vote: “Gibraltar is key to UK-facing remote gambling in particular and its status is now highly uncertain,” he said. “Operators with material operations in the jurisdiction should probably start thinking about contingency planning: this is no small job, especially since it affects so many operators and there are comparatively few choices.”

In a note published today (Tuesday), analysts at Morgan Stanley also noted that fears over Gibraltar complications were likely weighing on the sector. “Operators may need to relocate certain assets, personnel and licences to other EU jurisdictions such as Malta, in order to continue serving certain EU markets that are not locally licensed (Sweden, Germany, the Netherlands etc),” said the leisure and hotels team in a note to clients.

“Over time, we expect no material impact from this, with most EU countries already being locally licensed, or putting local licences in place, but the short-term disruption to services and staffing in Gibraltar could negatively impact 888 and William Hill in particular.”

The Lord of misrule

However, the Morgan Stanley team remained positive on the long-term prospects for the online sector. Pointing to gambling’s generally resilient qualities in times of economic stress, the analysts added that the “strong structural trends” in online remain in place. “While lower consumer spending and a possible recession would reduce growth rates, we would expect continued market growth for online in a mild consumer recession,” the note said.

The Morgan Stanley team were less sanguine, though, over the prospects for the land-based bookies. “Any increase in unemployment or reduction in consumer confidence would be a clear negative for the UK retail betting operators,” the team warned.

Pointing to the strong correlation between UK unemployment and retail revenue growth, Morgan Stanley said that with the high operational gearing at the high-street bookmakers, every 1% in like-for-like revenue is worth 3% in earnings per share at William Hill and 8% at Ladbrokes.

They added: “In the long-term, there could also be upward pressure on staff costs to the extent that reduced net migration into the UK puts upwards pressure on low-paid jobs, although we would not expect any material cost pressure beyond the pressure already included in forecasts from the living wage,” they add.

The bookies could be particularly at risk if an “unruly Brexit” occurs which the Morgan Stanley economists estimate could see UK GDP growth slowing to 0.8% this year and 0.5% next. The counter this, they suggest that should the UK slip into an outright recession (i.e. two consecutive quarters of negative GDP growth) then online gambling would be one of the more resilient sectors. The Morgan Stanley team suggest concluded that Playtech is one stock that is probably best positioned to withstand the coming weeks and months of uncertainty, with Paddy Power Betfair a slightly riskier play.

 

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